Talk me out of paying off mortgage
Re: Talk me out of paying off mortgage
I fall on pay off camp given you meet one of the criteria.
1) Home value(not mortgage) is under 20% of your assets and you can pay it off in few months.
(or)
2)you have reached coastFI number and can now begin to pay down the mortgage.
1) Home value(not mortgage) is under 20% of your assets and you can pay it off in few months.
(or)
2)you have reached coastFI number and can now begin to pay down the mortgage.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939
Re: Talk me out of paying off mortgage
With all the unknowns you listed why would you believe paying off mortgage is a good idea. You need money not a house. You are doing a serious mistake if you pay that mortgage, imo.foo.c wrote: ↑Mon Jul 13, 2020 12:24 am I have a little over 11 years left on a 15 year note @ 2.875%. ~300K left.
I'm a software engineer with 15 years at the same company. I wasn't furloughed and I think I'd be one of the last employees to be let go if things got worse. We've also started bringing people back.
My wife is an underpaid teacher, but I think with no mortgage we could get by on her salary and unemployment benefits would make it even easier. Also have some other hard assets that we could sell if we had to.
I'm not ecstatic about the stock market right now and feel like banking some returns and re-investing the mortgage payment each month.
"My conscience wants vegetarianism to win over the world. And my subconscious is yearning for a piece of juicy meat. But what do i want?" (Andrei Tarkovsky)
Re: Talk me out of paying off mortgage
I'm sitting in a very similar situation. We have a $275K 15 year mortgage at 2.75% fixed with about 10-11 years remaining. We've got $260K in savings plus another $433K in stocks in brokerage account that we could use to pay it off (a 12 month emergency fund would be around $120K for us).
We were investing $20K a month ($10K from savings and $10K excess cash flow) into stocks to get our EF down to a more reasonable level, but I haven't done that since April since stock valuations seem so high (we did load up a bunch in Feb/Mar though and moved nearly all our bonds to stocks in retirement near the bottom as well). So bottom line is our decision is to invest the cash or hold it or pay down debt. So far we've been holding and watching it slowly grow.
I'm tempted to wipe out the mortgage, but there is also the possibility of investing in distressed real estate in the COVID aftermath or simply upgrading our personal residence and renting out our townhome in the next year or so. So I've been holding. But now that MMA rates are essentially zero it does drive me a bit nuts to have so much cash lying around. I tend to be the one who says "pay it off, you can always get another mortgage if you don't like it," but the reality is that getting a cash out mortgage is way more expensive (new closing costs plus a rate premium for it being cash out), and getting a mortgage at all is a giant PITA - as I well know as a banker.
So we wait. AA is now 7% cash, 45% stocks, 47% investment RE, and 2% alternatives. But as soon as we get a much bigger pile of cash or decide we don't have any big short term goals to save for, I'll be paying down some debt. It's cheap, but when you have nothing better to do with your money paying off debt isn't a bad idea!
We were investing $20K a month ($10K from savings and $10K excess cash flow) into stocks to get our EF down to a more reasonable level, but I haven't done that since April since stock valuations seem so high (we did load up a bunch in Feb/Mar though and moved nearly all our bonds to stocks in retirement near the bottom as well). So bottom line is our decision is to invest the cash or hold it or pay down debt. So far we've been holding and watching it slowly grow.
I'm tempted to wipe out the mortgage, but there is also the possibility of investing in distressed real estate in the COVID aftermath or simply upgrading our personal residence and renting out our townhome in the next year or so. So I've been holding. But now that MMA rates are essentially zero it does drive me a bit nuts to have so much cash lying around. I tend to be the one who says "pay it off, you can always get another mortgage if you don't like it," but the reality is that getting a cash out mortgage is way more expensive (new closing costs plus a rate premium for it being cash out), and getting a mortgage at all is a giant PITA - as I well know as a banker.
So we wait. AA is now 7% cash, 45% stocks, 47% investment RE, and 2% alternatives. But as soon as we get a much bigger pile of cash or decide we don't have any big short term goals to save for, I'll be paying down some debt. It's cheap, but when you have nothing better to do with your money paying off debt isn't a bad idea!
"An investment in knowledge pays the best interest." - Benjamin Franklin
Re: Talk me out of paying off mortgage
Meg77 wrote: ↑Mon Jul 13, 2020 1:40 pm I'm sitting in a very similar situation. We have a $275K 15 year mortgage at 2.75% fixed with about 10-11 years remaining. We've got $260K in savings plus another $433K in stocks in brokerage account that we could use to pay it off (a 12 month emergency fund would be around $120K for us).
We were investing $20K a month ($10K from savings and $10K excess cash flow) into stocks to get our EF down to a more reasonable level, but I haven't done that since April since stock valuations seem so high (we did load up a bunch in Feb/Mar though and moved nearly all our bonds to stocks in retirement near the bottom as well). So bottom line is our decision is to invest the cash or hold it or pay down debt. So far we've been holding and watching it slowly grow.
I'm tempted to wipe out the mortgage, but there is also the possibility of investing in distressed real estate in the COVID aftermath or simply upgrading our personal residence and renting out our townhome in the next year or so. So I've been holding. But now that MMA rates are essentially zero it does drive me a bit nuts to have so much cash lying around. I tend to be the one who says "pay it off, you can always get another mortgage if you don't like it," but the reality is that getting a cash out mortgage is way more expensive (new closing costs plus a rate premium for it being cash out), and getting a mortgage at all is a giant PITA - as I well know as a banker.
So we wait. AA is now 7% cash, 45% stocks, 47% investment RE, and 2% alternatives. But as soon as we get a much bigger pile of cash or decide we don't have any big short term goals to save for, I'll be paying down some debt. It's cheap, but when you have nothing better to do with your money paying off debt isn't a bad idea!
So a couple of thoughts:
Fire
Retire
Economics of the stock market may change
Equity isn't a bad thing in your house
Diversification is good
Only time will tell what the right decision is
Mortgages means you are working for someone else
Just saying...
Nescio
Re: Talk me out of paying off mortgage
Mortgages don't "mean you are working for someone else" if you can afford to pay them off but choose not to. They indicate that you've made the conscious choice to hold a low-interest debt and use your available funds for another purpose, typically investing in something that is likely to have a higher return.bampf wrote: ↑Mon Jul 13, 2020 2:05 pmMeg77 wrote: ↑Mon Jul 13, 2020 1:40 pm I'm sitting in a very similar situation. We have a $275K 15 year mortgage at 2.75% fixed with about 10-11 years remaining. We've got $260K in savings plus another $433K in stocks in brokerage account that we could use to pay it off (a 12 month emergency fund would be around $120K for us).
We were investing $20K a month ($10K from savings and $10K excess cash flow) into stocks to get our EF down to a more reasonable level, but I haven't done that since April since stock valuations seem so high (we did load up a bunch in Feb/Mar though and moved nearly all our bonds to stocks in retirement near the bottom as well). So bottom line is our decision is to invest the cash or hold it or pay down debt. So far we've been holding and watching it slowly grow.
I'm tempted to wipe out the mortgage, but there is also the possibility of investing in distressed real estate in the COVID aftermath or simply upgrading our personal residence and renting out our townhome in the next year or so. So I've been holding. But now that MMA rates are essentially zero it does drive me a bit nuts to have so much cash lying around. I tend to be the one who says "pay it off, you can always get another mortgage if you don't like it," but the reality is that getting a cash out mortgage is way more expensive (new closing costs plus a rate premium for it being cash out), and getting a mortgage at all is a giant PITA - as I well know as a banker.
So we wait. AA is now 7% cash, 45% stocks, 47% investment RE, and 2% alternatives. But as soon as we get a much bigger pile of cash or decide we don't have any big short term goals to save for, I'll be paying down some debt. It's cheap, but when you have nothing better to do with your money paying off debt isn't a bad idea!
So a couple of thoughts:
Fire
Retire
Economics of the stock market may change
Equity isn't a bad thing in your house
Diversification is good
Only time will tell what the right decision is
Mortgages means you are working for someone else
Just saying...
Owning a home outright doesn't free you from the obligation to pay your real estate tax, though few people would claim that you're working for the taxing authority. It's a cost of ownership.
Re: Talk me out of paying off mortgage
I'll echo this. I'm new to this forum and have been surprised by the common thread of paying off mortgages with the current interest rates. While I agree with the lack of debt in principal, it is not necessarily the best financial move in all cases.ymmt wrote: ↑Mon Jul 13, 2020 10:56 amWant to echo this:Admiral wrote: ↑Mon Jul 13, 2020 10:12 am Just to be clear: there is broad confirmation bias from people who pay off mortgages early. IIRC there has been only one poster who has posted regrets. Forget user name.
Nobody enjoys debt. The issue is arbitraging it and leveraging a very low interest rate. Your rate is very low. Without your full financial picture I don’t see how anyone can say “pay it off!” Everything depends on your portfolio. If having a paid off house means you are cash poor then it’s not advisable in my view.
Paging KlangFool...
I'm actually very surprised by the lack of counterarguments towards OP's plan. There are a few instances where it makes sense, but history has proven that it's better to be involved in the markets than not. And it's especially true at OP's rate of financing.
In general, the big winners in the net worth thread probably haven't gotten there because they paid off their mortgages early.
OP: I would seriously take a look at what I wrote earlier, and hopefully it provides a good balance for your situation.
Currently, I'm trying to decide how to be strategic about our historically low interest rates and came here to get external perspective. I intentionally came here instead of MMM because I expected to receive a holistic view on personal finance as opposed to simply the FIRE/frugal perspective. Unfortunately, I've had limited success exploring this topic in this forum.
Re: Talk me out of paying off mortgage
You absolutely are working for the taxing authority. If labor and money are inextricably tied (or capital if you want to claim money works for you...) then by definition paying somebody for the privilege of using their money is working for someone else. Not my concept. That being said, any definition of debt means you are paying someone for the use of their capital. It might be prudent. It might be wise, but, you are trading your labor (or earnings) for their money today.Admiral wrote: ↑Mon Jul 13, 2020 2:30 pmMortgages don't "mean you are working for someone else" if you can afford to pay them off but choose not to. They indicate that you've made the conscious choice to hold a low-interest debt and use your available funds for another purpose, typically investing in something that is likely to have a higher return.bampf wrote: ↑Mon Jul 13, 2020 2:05 pmMeg77 wrote: ↑Mon Jul 13, 2020 1:40 pm I'm sitting in a very similar situation. We have a $275K 15 year mortgage at 2.75% fixed with about 10-11 years remaining. We've got $260K in savings plus another $433K in stocks in brokerage account that we could use to pay it off (a 12 month emergency fund would be around $120K for us).
We were investing $20K a month ($10K from savings and $10K excess cash flow) into stocks to get our EF down to a more reasonable level, but I haven't done that since April since stock valuations seem so high (we did load up a bunch in Feb/Mar though and moved nearly all our bonds to stocks in retirement near the bottom as well). So bottom line is our decision is to invest the cash or hold it or pay down debt. So far we've been holding and watching it slowly grow.
I'm tempted to wipe out the mortgage, but there is also the possibility of investing in distressed real estate in the COVID aftermath or simply upgrading our personal residence and renting out our townhome in the next year or so. So I've been holding. But now that MMA rates are essentially zero it does drive me a bit nuts to have so much cash lying around. I tend to be the one who says "pay it off, you can always get another mortgage if you don't like it," but the reality is that getting a cash out mortgage is way more expensive (new closing costs plus a rate premium for it being cash out), and getting a mortgage at all is a giant PITA - as I well know as a banker.
So we wait. AA is now 7% cash, 45% stocks, 47% investment RE, and 2% alternatives. But as soon as we get a much bigger pile of cash or decide we don't have any big short term goals to save for, I'll be paying down some debt. It's cheap, but when you have nothing better to do with your money paying off debt isn't a bad idea!
So a couple of thoughts:
Fire
Retire
Economics of the stock market may change
Equity isn't a bad thing in your house
Diversification is good
Only time will tell what the right decision is
Mortgages means you are working for someone else
Just saying...
Owning a home outright doesn't free you from the obligation to pay your real estate tax, though few people would claim that you're working for the taxing authority. It's a cost of ownership.
--Bampf
Nescio
Re: Talk me out of paying off mortgage
Ha, yes well we are all working for somebody else on some levels and have people or money working for us on others. You can never get rid of all obligations - taxes, familial or basic housing and spending needs (utilities, clothing, food, etc.). I take your point though and the aim is FIRE/RETIRE of course ultimately, diversification and equity are great, and things will always fluctuate over time. That's why I try to do a little bit of everything - invest, save, pay down debt, own various assets.bampf wrote: ↑Mon Jul 13, 2020 3:09 pmYou absolutely are working for the taxing authority. If labor and money are inextricably tied (or capital if you want to claim money works for you...) then by definition paying somebody for the privilege of using their money is working for someone else. Not my concept. That being said, any definition of debt means you are paying someone for the use of their capital. It might be prudent. It might be wise, but, you are trading your labor (or earnings) for their money today.Admiral wrote: ↑Mon Jul 13, 2020 2:30 pmMortgages don't "mean you are working for someone else" if you can afford to pay them off but choose not to. They indicate that you've made the conscious choice to hold a low-interest debt and use your available funds for another purpose, typically investing in something that is likely to have a higher return.bampf wrote: ↑Mon Jul 13, 2020 2:05 pmMeg77 wrote: ↑Mon Jul 13, 2020 1:40 pm I'm sitting in a very similar situation. We have a $275K 15 year mortgage at 2.75% fixed with about 10-11 years remaining. We've got $260K in savings plus another $433K in stocks in brokerage account that we could use to pay it off (a 12 month emergency fund would be around $120K for us).
We were investing $20K a month ($10K from savings and $10K excess cash flow) into stocks to get our EF down to a more reasonable level, but I haven't done that since April since stock valuations seem so high (we did load up a bunch in Feb/Mar though and moved nearly all our bonds to stocks in retirement near the bottom as well). So bottom line is our decision is to invest the cash or hold it or pay down debt. So far we've been holding and watching it slowly grow.
I'm tempted to wipe out the mortgage, but there is also the possibility of investing in distressed real estate in the COVID aftermath or simply upgrading our personal residence and renting out our townhome in the next year or so. So I've been holding. But now that MMA rates are essentially zero it does drive me a bit nuts to have so much cash lying around. I tend to be the one who says "pay it off, you can always get another mortgage if you don't like it," but the reality is that getting a cash out mortgage is way more expensive (new closing costs plus a rate premium for it being cash out), and getting a mortgage at all is a giant PITA - as I well know as a banker.
So we wait. AA is now 7% cash, 45% stocks, 47% investment RE, and 2% alternatives. But as soon as we get a much bigger pile of cash or decide we don't have any big short term goals to save for, I'll be paying down some debt. It's cheap, but when you have nothing better to do with your money paying off debt isn't a bad idea!
So a couple of thoughts:
Fire
Retire
Economics of the stock market may change
Equity isn't a bad thing in your house
Diversification is good
Only time will tell what the right decision is
Mortgages means you are working for someone else
Just saying...
Owning a home outright doesn't free you from the obligation to pay your real estate tax, though few people would claim that you're working for the taxing authority. It's a cost of ownership.
--Bampf
"An investment in knowledge pays the best interest." - Benjamin Franklin
Re: Talk me out of paying off mortgage
Welcome to the forum. People here feel both ways.w1337 wrote: ↑Mon Jul 13, 2020 2:58 pm I'll echo this. I'm new to this forum and have been surprised by the common thread of paying off mortgages with the current interest rates. While I agree with the lack of debt in principal, it is not necessarily the best financial move in all cases.
Currently, I'm trying to decide how to be strategic about our historically low interest rates and came here to get external perspective. I intentionally came here instead of MMM because I expected to receive a holistic view on personal finance as opposed to simply the FIRE/frugal perspective. Unfortunately, I've had limited success exploring this topic in this forum.
I don't think anybody is saying that paying off the mortgage is the best financial move, not with an interest rate that low.
If you look back through the comments, they are talking about their psychological and emotional responses to having paid off the mortgage. That is important to a lot of people on this forum. It is not all about finances and being frugal. There are other important aspects as well.
I happen to have chosen to hold a mortgage with a low rate - because it is financially a reasonable choice and I do not have debt aversion about paying for a house long term. But I don't recall ever reading anyone say "I wish I had not paid off the mortgage". Pretty much everyone who does it is happy they did. So even when it is not the best financial decision, that does not make it a mistake.
Link to Asking Portfolio Questions
Re: Talk me out of paying off mortgage
OP,
My portfolio excluding the house is about 1.4 million. My AA is 60/40. My mortgage is 300K at a fixed 3.49% over 30 years. I do not feel safe paying off my mortgage.
1) Why do you think that the market will return less than 2.875% per year over the next 11 years?
2) If (1) is true, why do you think that it is safe to tie up more of your money into the illiquid house?
KlangFool
My portfolio excluding the house is about 1.4 million. My AA is 60/40. My mortgage is 300K at a fixed 3.49% over 30 years. I do not feel safe paying off my mortgage.
1) Why do you think that the market will return less than 2.875% per year over the next 11 years?
2) If (1) is true, why do you think that it is safe to tie up more of your money into the illiquid house?
KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Re: Talk me out of paying off mortgage
You didn’t post your entire financial picture, but no, I wouldn’t pay it off. Since you said you’d “reinvest” the extra monthly cash flow, I’m assuming you’re gonna sell equities to pay off the mortgage. So you are reducing your diversification and concentrating your net worth in a single, presumably low growth asset.
Bogleheads are typically for diversification, until suddenly they are not.
Bogleheads are typically for diversification, until suddenly they are not.
“Conventional Treasury rates are risk free only in the sense that they guarantee nominal principal. But their real rate of return is uncertain until after the fact.” -Risk Less and Prosper
Re: Talk me out of paying off mortgage
1) I don't necessarily think that.KlangFool wrote: ↑Mon Jul 13, 2020 4:04 pm OP,
My portfolio excluding the house is about 1.4 million. My AA is 60/40. My mortgage is 300K at a fixed 3.49% over 30 years. I do not feel safe paying off my mortgage.
1) Why do you think that the market will return less than 2.875% per year over the next 11 years?
2) If (1) is true, why do you think that it is safe to tie up more of your money into the illiquid house?
KlangFool
2) How can having a paid off house not be safe?
Re: Talk me out of paying off mortgage
For everyone that recommends leveraging the house for investing in the stock market, wouldn't selling the house and renting be even better? I could put 500k into the market if I did that. Stocks will probably even outpace rents (I made that up, but not impossible).
Re: Talk me out of paying off mortgage
Is it a 2.5M house? Or does 500k represent the entire value of the house, so that a typical mortgage would allow you to invest ~400k?foo.c wrote: ↑Mon Jul 13, 2020 4:21 pm For everyone that recommends leveraging the house for investing in the stock market, wouldn't selling the house and renting be even better? I could put 500k into the market if I did that. Stocks will probably even outpace rents (I made that up, but not impossible).
“Conventional Treasury rates are risk free only in the sense that they guarantee nominal principal. But their real rate of return is uncertain until after the fact.” -Risk Less and Prosper
Re: Talk me out of paying off mortgage
The OP has given very few details about the rest of their situation so it is hard to make a good argument one way or the other.
When that happens many posters just say what they would do based in their situation which may be very different than the OPs.
Re: Talk me out of paying off mortgage
foo.c,foo.c wrote: ↑Mon Jul 13, 2020 4:07 pm1) I don't necessarily think that.KlangFool wrote: ↑Mon Jul 13, 2020 4:04 pm OP,
My portfolio excluding the house is about 1.4 million. My AA is 60/40. My mortgage is 300K at a fixed 3.49% over 30 years. I do not feel safe paying off my mortgage.
1) Why do you think that the market will return less than 2.875% per year over the next 11 years?
2) If (1) is true, why do you think that it is safe to tie up more of your money into the illiquid house?
KlangFool
2) How can having a paid off house not be safe?
<<1) I don't necessarily think that.>>
Action speaks louder than words. In order to justify paying off a 2.875% mortgage, you have to assume that the market will return less than 2.875% over the next 11 years. Or else, why would you choose to do this?
<<2) How can having a paid off house not be safe?>>
Please explain to me how can a paid-off house be safe? Your base assumption is you do not need to move away from this location. If that is not true, can you afford to rent a new location and maintain this house at the same time?
In Asian Currency crisis, I had to move away from one country to another in order to find a job. In some other crisis, I had to move from one region of the country to a new region. In all those crises, the housing market crashed at the same time.
KlangFool
30% VWENX | 16% VFWAX/VTIAX | 14.5% VTSAX | 19.5% VBTLX | 10% VSIAX/VTMSX/VSMAX | 10% VSIGX| 30% Wellington 50% 3-funds 20% Mini-Larry
Re: Talk me out of paying off mortgage
I'm more interested in the abstract arguments.
Re: Talk me out of paying off mortgage
Re: Talk me out of paying off mortgage
foo.c,foo.c wrote: ↑Mon Jul 13, 2020 5:04 pmUnless houses cost 1 million.
So what? Even if the house costs 2 million, it still does not change anything. When the crisis is bad enough, you cannot sell any house. Especially the house at a higher price range.
If both the stock and house drops 50%, you can sell 50K worth of stock at 25K loss. You cannot sell 50K of the house. If you sell the 1 million house, it will be 500K loss.
KlangFool
Last edited by KlangFool on Mon Jul 13, 2020 5:10 pm, edited 1 time in total.
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Re: Talk me out of paying off mortgage
You'll have to explain to me why that matters, because I don't think it does.foo.c wrote: ↑Mon Jul 13, 2020 5:04 pmUnless houses cost 1 million.
Re: Talk me out of paying off mortgage
Because OP does not think the 1 million houses can drop as much as the stock.lazydavid wrote: ↑Mon Jul 13, 2020 5:09 pmYou'll have to explain to me why that matters, because I don't think it does.foo.c wrote: ↑Mon Jul 13, 2020 5:04 pmUnless houses cost 1 million.
KlangFool
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Re: Talk me out of paying off mortgage
And you only need to make a NOMINAL return better than the mortgage rate. That's why my 2.75% mortgage is so appealing. If inflation averages 2% for the next 30 years, I only need to make 0.75% real return on that money vs paying off the house. And if inflation takes off, that 2.75% mortgage will be making me money in real terms. Almost better than TIPS. My spreadsheet says I would be an idiot to pay off a 2.75% 30 year mortgage. Firecalc is fairly neutral. I still might pay off my mortgage, though.KlangFool wrote: ↑Mon Jul 13, 2020 4:48 pmfoo.c,foo.c wrote: ↑Mon Jul 13, 2020 4:07 pm1) I don't necessarily think that.KlangFool wrote: ↑Mon Jul 13, 2020 4:04 pm OP,
My portfolio excluding the house is about 1.4 million. My AA is 60/40. My mortgage is 300K at a fixed 3.49% over 30 years. I do not feel safe paying off my mortgage.
1) Why do you think that the market will return less than 2.875% per year over the next 11 years?
2) If (1) is true, why do you think that it is safe to tie up more of your money into the illiquid house?
KlangFool
2) How can having a paid off house not be safe?
<<1) I don't necessarily think that.>>
Action speaks louder than words. In order to justify paying off a 2.875% mortgage, you have to assume that the market will return less than 2.875% over the next 11 years. Or else, why would you choose to do this?
<<2) How can having a paid off house not be safe?>>
Please explain to me how can a paid-off house be safe? Your base assumption is you do not need to move away from this location. If that is not true, can you afford to rent a new location and maintain this house at the same time?
In Asian Currency crisis, I had to move away from one country to another in order to find a job. In some other crisis, I had to move from one region of the country to a new region. In all those crises, the housing market crashed at the same time.
KlangFool
Consistently sets low goals and fails to achieve them.
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Re: Talk me out of paying off mortgage
deleted
Last edited by AerialWombat on Sat Feb 05, 2022 9:33 pm, edited 1 time in total.
This post is a work of fiction. Any similarity to real financial advice is purely coincidental.
Re: Talk me out of paying off mortgage
KlangFool wrote: ↑Mon Jul 13, 2020 4:48 pmfoo.c,foo.c wrote: ↑Mon Jul 13, 2020 4:07 pm1) I don't necessarily think that.KlangFool wrote: ↑Mon Jul 13, 2020 4:04 pm OP,
My portfolio excluding the house is about 1.4 million. My AA is 60/40. My mortgage is 300K at a fixed 3.49% over 30 years. I do not feel safe paying off my mortgage.
1) Why do you think that the market will return less than 2.875% per year over the next 11 years?
2) If (1) is true, why do you think that it is safe to tie up more of your money into the illiquid house?
KlangFool
2) How can having a paid off house not be safe?
<<1) I don't necessarily think that.>>
Action speaks louder than words. In order to justify paying off a 2.875% mortgage, you have to assume that the market will return less than 2.875% over the next 11 years. Or else, why would you choose to do this?
<<2) How can having a paid off house not be safe?>>
Please explain to me how can a paid-off house be safe? Your base assumption is you do not need to move away from this location. If that is not true, can you afford to rent a new location and maintain this house at the same time?
In Asian Currency crisis, I had to move away from one country to another in order to find a job. In some other crisis, I had to move from one region of the country to a new region. In all those crises, the housing market crashed at the same time.
KlangFool
It CAN return less than 2.875% for 11 years. Neither you nor I know what it will return.
With no mortgage my monthly expenses are highly under my control and I can't be evicted. My wife and I both have steady jobs and likely wouldn't even have to touch savings if only one of us lost a job, but would have to cut back.
I'm not moving out the country and I already live near one of the best job markets in the country for my profession. I have contacts here too.
A scenario where home values crash and a mostly stock portfolio does not seems unlikely. When your portfolio falls 40% or whatever and you're pulling out money to pay the mortgage it's going to hurt.
Re: Talk me out of paying off mortgage
For the abstract arguments a message board may be the wrong place to look.foo.c wrote: ↑Mon Jul 13, 2020 5:03 pmI'm more interested in the abstract arguments.
I did not read it but a quick Google search found a bunch of Phd Theseses like this one.
posting.php?mode=quote&f=2&p=5369092MORTGAGE LOANS AND FINANCIAL SECURITY AMONG MIDDLE-AGED AND OLDER AMERICANS
There were others too.
Re: Talk me out of paying off mortgage
Cash doesn't have much of a return lately. It's not king.lazydavid wrote: ↑Mon Jul 13, 2020 5:09 pmYou'll have to explain to me why that matters, because I don't think it does.foo.c wrote: ↑Mon Jul 13, 2020 5:04 pmUnless houses cost 1 million.
Re: Talk me out of paying off mortgage
foo.c,foo.c wrote: ↑Mon Jul 13, 2020 5:24 pmKlangFool wrote: ↑Mon Jul 13, 2020 4:48 pmfoo.c,foo.c wrote: ↑Mon Jul 13, 2020 4:07 pm1) I don't necessarily think that.KlangFool wrote: ↑Mon Jul 13, 2020 4:04 pm OP,
My portfolio excluding the house is about 1.4 million. My AA is 60/40. My mortgage is 300K at a fixed 3.49% over 30 years. I do not feel safe paying off my mortgage.
1) Why do you think that the market will return less than 2.875% per year over the next 11 years?
2) If (1) is true, why do you think that it is safe to tie up more of your money into the illiquid house?
KlangFool
2) How can having a paid off house not be safe?
<<1) I don't necessarily think that.>>
Action speaks louder than words. In order to justify paying off a 2.875% mortgage, you have to assume that the market will return less than 2.875% over the next 11 years. Or else, why would you choose to do this?
<<2) How can having a paid off house not be safe?>>
Please explain to me how can a paid-off house be safe? Your base assumption is you do not need to move away from this location. If that is not true, can you afford to rent a new location and maintain this house at the same time?
In Asian Currency crisis, I had to move away from one country to another in order to find a job. In some other crisis, I had to move from one region of the country to a new region. In all those crises, the housing market crashed at the same time.
KlangFool
It CAN return less than 2.875% for 11 years. Neither you nor I know what it will return.
With no mortgage my monthly expenses are highly under my control and I can't be evicted. My wife and I both have steady jobs and likely wouldn't even have to touch savings if only one of us lost a job, but would have to cut back.
I'm not moving out the country and I already live near one of the best job markets in the country for my profession. I have contacts here too.
A scenario where home values crash and a mostly stock portfolio does not seems unlikely. When your portfolio falls 40% or whatever and you're pulling out money to pay the mortgage it's going to hurt.
<<It CAN return less than 2.875% for 11 years. Neither you nor I know what it will return. >>
And, if that is true, it will not be safe for you to stay where you are.
<<With no mortgage my monthly expenses are highly under my control and I can't be evicted. My wife and I both have steady jobs and likely wouldn't even have to touch savings if only one of us lost a job, but would have to cut back. >>
In a recession, all bets are off. We have close to 50 million unemployed and you think that you have steady jobs.
<<I'm not moving out the country and I already live near one of the best job markets in the country for my profession. I have contacts here too. >>
Basically, you had never faced a crisis as bad as the Asian Currency Crisis.
<<A scenario where home values crash and a mostly stock portfolio does not seems unlikely. When your portfolio falls 40% or whatever and you're pulling out money to pay the mortgage it's going to hurt.>>
And, it does not hurt as much as having to sell the house.
I wish you the best of luck. Hoping to be lucky is not a good planning strategy.
KlangFool
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Re: Talk me out of paying off mortgage
foo.c,foo.c wrote: ↑Mon Jul 13, 2020 5:30 pmCash doesn't have much of a return lately. It's not king.lazydavid wrote: ↑Mon Jul 13, 2020 5:09 pmYou'll have to explain to me why that matters, because I don't think it does.foo.c wrote: ↑Mon Jul 13, 2020 5:04 pmUnless houses cost 1 million.
In a recession, it is king. We have 50+ million unemployed. Do you think that we are not in a recession?
KlangFool
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Re: Talk me out of paying off mortgage
If you are using now as an example both stocks and houses are doing well (at least in my area), so it doesn't seem like a great example.
Re: Talk me out of paying off mortgage
What about a situation where home prices stay completely flat for 10-20 years? Does that seem conceivable? The long-term real return on housing is probably slightly above zero (less than 1%). If your AA is overly weighted to your housing, that's a lot of return you are likely giving up for the next 10, 15, 30 years (whatever). Again, you are reducing your diversification.
“Conventional Treasury rates are risk free only in the sense that they guarantee nominal principal. But their real rate of return is uncertain until after the fact.” -Risk Less and Prosper
Re: Talk me out of paying off mortgage
OP,
You should be at least consistent and coherent in your assumption.
A) The world is not going to hell.
B) The world is going to hell.
Pick (A) or (B).
If the stock market is returning less than 2.875% per year over next 11 years. It means that the economy is in such bad shape that the return is less than inflation. We are in a recession for over 11 years. That means we are in (B). In that case, why would you pay off the mortgage? You need to get out where you are.
If the world is not going to hell, aka (A), the stock market will return more than 2.875% per year over the next 11 years. Why would you pay off the mortgage?
Pick (A) or (B). The answer is still the same.
KlangFool
You should be at least consistent and coherent in your assumption.
A) The world is not going to hell.
B) The world is going to hell.
Pick (A) or (B).
If the stock market is returning less than 2.875% per year over next 11 years. It means that the economy is in such bad shape that the return is less than inflation. We are in a recession for over 11 years. That means we are in (B). In that case, why would you pay off the mortgage? You need to get out where you are.
If the world is not going to hell, aka (A), the stock market will return more than 2.875% per year over the next 11 years. Why would you pay off the mortgage?
Pick (A) or (B). The answer is still the same.
KlangFool
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Re: Talk me out of paying off mortgage
For now. How long can it last with 50+ million unemployed and 1+ million more every week?
KlangFool
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Re: Talk me out of paying off mortgage
Why should any plan be based only on the absolute worst case. If one has sufficient EF and also making sufficient provisions for retirement, then surely one can prioritize mortgage payoff over putting additional investments in the market. No?
superstition: belief that market will one day come around to your concept of fair value
Re: Talk me out of paying off mortgage
Then why be in any stocks?KlangFool wrote: ↑Mon Jul 13, 2020 5:42 pmFor now. How long can it last with 50+ million unemployed and 1+ million more every week?
KlangFool
Re: Talk me out of paying off mortgage
So in A, my returns are sub-optimal. Ok, I can live with that. I'm pretty sure I could still match your 60/40 portfolios performance.KlangFool wrote: ↑Mon Jul 13, 2020 5:41 pm OP,
You should be at least consistent and coherent in your assumption.
A) The world is not going to hell.
B) The world is going to hell.
Pick (A) or (B).
If the stock market is returning less than 2.875% per year over next 11 years. It means that the economy is in such bad shape that the return is less than inflation. We are in a recession for over 11 years. That means we are in (B). In that case, why would you pay off the mortgage? You need to get out where you are.
If the world is not going to hell, aka (A), the stock market will return more than 2.875% per year over the next 11 years. Why would you pay off the mortgage?
Pick (A) or (B). The answer is still the same.
KlangFool
It's not like I would be destitute because I don't have mortgage. B makes no sense to me. I could lose 100% of my house and still have enough to leave the country. (Which isn't going to happen anyway.)
Re: Talk me out of paying off mortgage
SB1234,
Please define what do you mean by sufficient for a 495K house and 300K mortgage.
<<Why should any plan be based only on the absolute worst case.>>
Hope for the best. Plan for the worst. If you can survive the worst, then, you are prepared.
KlangFool
Last edited by KlangFool on Mon Jul 13, 2020 6:28 pm, edited 1 time in total.
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Re: Talk me out of paying off mortgage
A) I am not the one that assumes the stock will return less than 2.875% per year over the next 11 years. You are. If you believe that, why are you investing in stock at all?foo.c wrote: ↑Mon Jul 13, 2020 5:49 pmThen why be in any stocks?KlangFool wrote: ↑Mon Jul 13, 2020 5:42 pmFor now. How long can it last with 50+ million unemployed and 1+ million more every week?
KlangFool
B) I am prepared for a recession, unemployment, and a market downturn lasting 5 years. How about you?
KlangFool
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Re: Talk me out of paying off mortgage
foo.c,foo.c wrote: ↑Mon Jul 13, 2020 5:58 pmSo in A, my returns are sub-optimal. Ok, I can live with that. I'm pretty sure I could still match your 60/40 portfolios performance.KlangFool wrote: ↑Mon Jul 13, 2020 5:41 pm OP,
You should be at least consistent and coherent in your assumption.
A) The world is not going to hell.
B) The world is going to hell.
Pick (A) or (B).
If the stock market is returning less than 2.875% per year over next 11 years. It means that the economy is in such bad shape that the return is less than inflation. We are in a recession for over 11 years. That means we are in (B). In that case, why would you pay off the mortgage? You need to get out where you are.
If the world is not going to hell, aka (A), the stock market will return more than 2.875% per year over the next 11 years. Why would you pay off the mortgage?
Pick (A) or (B). The answer is still the same.
KlangFool
It's not like I would be destitute because I don't have mortgage. B makes no sense to me. I could lose 100% of my house and still have enough to leave the country. (Which isn't going to happen anyway.)
<<So in A, my returns are sub-optimal. Ok, I can live with that. I'm pretty sure I could still match your 60/40 portfolios performance.>>
How do you know unless you calculated the number? What is 300K of 4% additional per year return over 11 years?
<<It's not like I would be destitute because I don't have mortgage. B makes no sense to me. I could lose 100% of my house and still have enough to leave the country. (Which isn't going to happen anyway.)>>
How do you know? Did you calculate the numbers?
KlangFool
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Re: Talk me out of paying off mortgage
Reasons to consider not to pay off your mortgage, in my opinion:foo.c wrote: ↑Mon Jul 13, 2020 12:24 am I have a little over 11 years left on a 15 year note @ 2.875%. ~300K left.
I'm a software engineer with 15 years at the same company. I wasn't furloughed and I think I'd be one of the last employees to be let go if things got worse. We've also started bringing people back.
My wife is an underpaid teacher, but I think with no mortgage we could get by on her salary and unemployment benefits would make it even easier. Also have some other hard assets that we could sell if we had to.
I'm not ecstatic about the stock market right now and feel like banking some returns and re-investing the mortgage payment each month.
1.) You have a non-recourse loan. (If I had to buy a $2 million dollar shack in the bay area, keeping a floor on my losses would make me feel much more comfortable.)
2.) You want to increase your equity exposure beyond 100%. (A mortgage is the best rate you can get on leverage, and no risk of margin call.)
3.) You do not have ample liquidity.
None of those conditions applied to me, so I paid mine off a few months ago. My remaining balance was also 300k on a 650k home value, I did open a HELOC as well on the property, 500k credit line at prime -0.5% (2.75% currently), I don't need it but there were no fees to open it, 10 year draw period. I also have about 200k in a taxable account which would cover our expenses for about 5 years, and 1million in retirement accounts.
Good luck with your decision
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Re: Talk me out of paying off mortgage
While I tend to side with the emotional satisfaction of paying off the mortgage, this doesn’t really make sense.With no mortgage my monthly expenses are highly under my control and I can't be evicted. My wife and I both have steady jobs and likely wouldn't even have to touch savings if only one of us lost a job, but would have to cut back.
If all your expenses are, say, $100K per year, you can pay ALL expenses for 3 years through a job loss. You are not at risk of being evicted at all. Even if this money is invested & goes down 50%, you still have 18 months of living expenses.
If you pay off your house with that 300K, you won’t have a mortgage, but in case of double job loss you still have to pay for all your OTHER living expenses. And if you can’t afford to eat, it doesn’t really matter if you have a house. You’ll have to sell it anyway to eat.
So it’s false to say categorically that a paid off mortgage is safer & protects you more. If one of you loses your job, you still have 300K sitting there you can use for months & months of mortgage payments!!
I think that’s why it’s hard to discuss this in the abstract.... if you have a couple years living expenses not tied up in retirement accounts then sure, pay it off. Otherwise, it could be risky.
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Re: Talk me out of paying off mortgage
Someone here once wisely said that when a financial question produces strong passionate opinions on both sides, there probably is no right answer. I suspect that is the case here. Either pay it off or don't, 20 years from now it probably won't have mattered much either way. Personally I think the psychological benefits of being mortgage-free is under-appreciated. I'd pay it off.
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Re: Talk me out of paying off mortgage
If I were in the OP’s situation, and in most situations, I recommend never paying off debt that’s under 5%. Had one more student loan left under 4.5%, and paid it off the other day because it was so small, but we always kept our mortgage around when we owned a house. Just keep plowing money into the market usually is the better optionwhodidntante wrote: ↑Mon Jul 13, 2020 12:02 pm I purposely carried cheap debt and increased my level of debt for several years to take advantage of cheap leverage. I know it involves some luck but the results were absolutely fantastic. I didn't choose to pay off my mortgage until I chose to reduce my level of risk by deleveraging. The mortgage should be gone next month unless I'm too lazy to deal with the payoff statement and certified check and county and whatnot. I don't seem to get as excited about paying off low-interest debt as some here do.
Ironically, I'm going to pay it off with money gained from unemployment. Currently furloughed. LOL
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Re: Talk me out of paying off mortgage
I also agree. Selling bonds to pay off the mortgage, apart from tax concerns, seems like a no-brainer as long as the OP will have adequate liquidity after doing so. Selling stocks to pay off the mortgage definitely involves more uncertainty.sperry8 wrote: ↑Mon Jul 13, 2020 11:41 amThis. If you are using bonds/cash to pay off mortgage I'd say it's a no brainer (these investments aren't likely to return more than paying off debt). If you're using stock allocation to pay off mortgage it could be a loser from a financial perspective (assuming stocks return higher than mortgage rate + house appreciation) but you must also factor in psychological security gain.vineviz wrote: ↑Mon Jul 13, 2020 7:39 am
If you have a large enough bond allocation that you can use some or all of it to pay off the mortgage, then that’s usually a prudent move. Economically, a mortgage is effectively a reverse bond so this transaction is neutral in terms of asset allocation.
Reducing your STOCK holdings to do the same thing is more questionable, since that raises questions of market timing.
If we assume forward stock returns are reasonably estimated by 1/CAPE, that currently works out to 3.4% real. If you add 1.4% for inflation, as suggested by the current 10 year TIPS break-even rate, that's 4.8% nominal before taxes.
Given the choice between a guaranteed 2.875% post-tax return and an expected but highly volatile 4.8% pre-tax return, some would opt for the former, and others would opt for the latter. That doesn't seem like a slam-dunk to me either way.
The Sensible Steward
Re: Talk me out of paying off mortgage
Risk, rates and return, I’m no expert. But to me your own house, where you sleep at night, is more than just financial security it also has some component of physical security. Knowing a bank can’t knock on your door and tell you to move out when times are bad, to me adds something over a simple investment return. The only person who should have any input into when it’s time to move is you and your close family.
Regardless of interest rates, real estate prices, stock market movements, you still know where you will be sleeping at night. Which to me gives you some form of long term security. Just thinking out loud.
Regardless of interest rates, real estate prices, stock market movements, you still know where you will be sleeping at night. Which to me gives you some form of long term security. Just thinking out loud.
I studied Physics not Finance, so best to ignore anything I say about money.
Re: Talk me out of paying off mortgage
Welcome to BH. It's a great place to learn a lot about a bunch of things, but unfortunately this isn't one of them. Think: tastes great, less filling.w1337 wrote: ↑Mon Jul 13, 2020 2:58 pmI'll echo this. I'm new to this forum and have been surprised by the common thread of paying off mortgages with the current interest rates. While I agree with the lack of debt in principal, it is not necessarily the best financial move in all cases.ymmt wrote: ↑Mon Jul 13, 2020 10:56 amWant to echo this:Admiral wrote: ↑Mon Jul 13, 2020 10:12 am Just to be clear: there is broad confirmation bias from people who pay off mortgages early. IIRC there has been only one poster who has posted regrets. Forget user name.
Nobody enjoys debt. The issue is arbitraging it and leveraging a very low interest rate. Your rate is very low. Without your full financial picture I don’t see how anyone can say “pay it off!” Everything depends on your portfolio. If having a paid off house means you are cash poor then it’s not advisable in my view.
Paging KlangFool...
I'm actually very surprised by the lack of counterarguments towards OP's plan. There are a few instances where it makes sense, but history has proven that it's better to be involved in the markets than not. And it's especially true at OP's rate of financing.
In general, the big winners in the net worth thread probably haven't gotten there because they paid off their mortgages early.
OP: I would seriously take a look at what I wrote earlier, and hopefully it provides a good balance for your situation.
Currently, I'm trying to decide how to be strategic about our historically low interest rates and came here to get external perspective. I intentionally came here instead of MMM because I expected to receive a holistic view on personal finance as opposed to simply the FIRE/frugal perspective. Unfortunately, I've had limited success exploring this topic in this forum.
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Re: Talk me out of paying off mortgage
1. Is your portfolio really 60/40 if $300k of it is borrowed from a bank?KlangFool wrote: ↑Mon Jul 13, 2020 4:04 pm OP,
My portfolio excluding the house is about 1.4 million. My AA is 60/40. My mortgage is 300K at a fixed 3.49% over 30 years. I do not feel safe paying off my mortgage.
1) Why do you think that the market will return less than 2.875% per year over the next 11 years?
2) If (1) is true, why do you think that it is safe to tie up more of your money into the illiquid house?
KlangFool
2. What is the yield on your $560k of bonds? If it's after tax return is less than 3.49%, then that is the cost you are paying ever year to have this extra security.
3. If borrowing to invest is always safer, then do you refinance at a higher loan amount when your home value goes up so you have more cash to invest?
Re: Talk me out of paying off mortgage
PowderDay9,PowderDay9 wrote: ↑Mon Jul 13, 2020 8:49 pm1. Is your portfolio really 60/40 if $300k of it is borrowed from a bank?KlangFool wrote: ↑Mon Jul 13, 2020 4:04 pm OP,
My portfolio excluding the house is about 1.4 million. My AA is 60/40. My mortgage is 300K at a fixed 3.49% over 30 years. I do not feel safe paying off my mortgage.
1) Why do you think that the market will return less than 2.875% per year over the next 11 years?
2) If (1) is true, why do you think that it is safe to tie up more of your money into the illiquid house?
KlangFool
2. What is the yield on your $560k of bonds? If it's after tax return is less than 3.49%, then that is the cost you are paying ever year to have this extra security.
3. If borrowing to invest is always safer, then do you refinance at a higher loan amount when your home value goes up so you have more cash to invest?
4. Using your logic, why not buy a $1M house so you can get an $800k mortgage. Then you could have a $1.9M portfolio and that would last even longer.
It is very simple.
1) I do not buy the illusion of the mortgage as the same as the "negative bond". Liquidity matters.
2) I borrowed 300K to invest in my 60/40 portfolio. If you want to justify paying off a house because you can only invest in the bond, it is your choice.
<<3. If borrowing to invest is always safer, then do you refinance at a higher loan amount when your home value goes up so you have more cash to invest?>>
I did not say that. It is highly dependent on your portfolio size versus the house's price. For example, if my portfolio is at 1.8 million, I would probably pay off the mortgage.
<<4. Using your logic, why not buy a $1M house so you can get an $800k mortgage. Then you could have a $1.9M portfolio and that would last even longer.>>
1) I only buy a house when the PITI of buying the house is 20% to 30% cheaper than renting the house.
2) I do not want to live in a 1 million house.
KlangFool
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